Shipping must not ignore new revenue standard

The new accounting standard IFRS 15, Revenue from Contracts with Customers, comes into force from 1 January 2018. It excludes revenues under leasing contracts, so income from bareboat charters and the asset element of time charters will be unaffected. Rather, the effect will be on the service element of time charters and on voyage charters.

The key change is one of approach. Current practice looks at revenue recognition by reference to what is being done by the seller. The new standard looks at what is being received by the buyer.
There are various bases currently used for voyage accounting, most commonly discharge-to-discharge. That makes sense when looked at in terms of what the shipping company is doing, but not if we look at what the charterer is receiving. Voyage accounting is expected to move to a load-to-discharge basis, since that reflects the period over which the charterer is obtaining benefit.

That leaves the question of the accounting treatment of relocation costs, such as a ballast leg. Such costs can be carried forward prior to load if they meet all three conditions:
  • they relate directly to a contract;
  • they generate or enhance resources to be used in meeting obligations under the contract;
  • they are expected to be recovered.
Where costs are carried forward, they will be written off over the period of the next voyage. The criteria will often be met, although care will need to be taken to ensure that general and administrative overheads are not included. The final criterion also means costs cannot be carried forward where the charter is expected to result in a loss.

So compared to current practice, revenue will start to be recognised a little later, and for fewer days each year. On those days when revenue is recognised, the amounts will, of course, be higher. The change in total revenue, and profit, will arise only in relation to those voyages, or periods of relocation, which straddle the end of a year. This will also effect key performance measures, such as Time Charter Equivalents (TCE).

By comparison with the new leasing standard, IFRS16, the new revenue standard is going to have a much more limited impact on the shipping industry. But it can’t be entirely ignored.

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